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ACCA Applied Skills · Financial Management

Sources of, and Raising, Business Finance for ACCA FM

Sources of business finance are the ways a company funds its short-term and long-term needs: equity, retained earnings, debt, leasing, hybrids, Islamic finance and venture capital. To solve questions, match the source to the need, compare cost, risk, control and security, then justify your choice with the scenario facts.

What this chapter covers

This chapter covers where a business gets money and how it raises it. You start by splitting needs into short-term and long-term. Then you study equity and share issues, debt, leasing and hybrids, Islamic finance, venture capital and business angels, and dividend policy with retained earnings.

Most of the chapter is discussion, with a few calculations. You may need to work out the theoretical ex-rights price, the value of rights, or compare lease and buy. Examiners ask you to advise a company, so you must link each source to the facts given: size, listing status, gearing, assets available and the purpose of the funds.

This chapter feeds the rest of FM. Cost of capital uses the cost of equity and debt you meet here. Capital structure and gearing depend on the mix of sources. Investment appraisal asks how a project is funded. Working capital management links to short-term finance. Learn it well and later chapters become easier.

Finance-source questions appear in objective questions and in written Section C answers, where you must give reasoned advice. Many of the questions are not hard calculations, so careful students can score well. Marks come from applying a source to a scenario, not from reciting lists. A solid grasp here also supports your cost of capital and gearing work, so the effort pays off twice.

Sources of, and raising, business finance: topics in the order to study them

  1. 1Short-term vs Long-term Sources of FinanceStart here because it gives the framework: match the funding term to the life of the asset or need.
  2. 2Equity Finance and Share IssuesEquity is the core long-term source, and rights issue calculations come with it.
  3. 3Debt Finance, Leasing and Hybrid InstrumentsOnce you know equity, compare it with debt, leases and convertibles to see the trade-offs.
  4. 4Islamic FinanceIt builds on debt and equity ideas, so you can see how interest-free structures differ.
  5. 5Venture Capital, Business Angels and Other SourcesThis covers funding for unlisted and growing firms, which is easier once the main sources are clear.
  6. 6Dividend Policy and Retained EarningsFinish with internal funds and payout decisions, which tie together your view of equity and financing.

How to prepare Sources of, and raising, business finance

Treat this as a chapter of judgement plus a few calculations. Practise both.

  1. Read the six topics once for the big picture, noting what each source costs, risks and gives up.
  2. Build a one-page comparison grid of sources by cost, risk, control, security, speed and who can use them.
  3. Practise rights issue calculations until the theoretical ex-rights price and value of a right are routine.
  4. Do lease versus buy questions, laying out cash flows and discounting them clearly.
  5. Take scenario questions and write short advice: pick a source, give two reasons from the facts, state one drawback.
  6. Practise objective questions under time pressure, since they are all or nothing and need careful reading.
  7. Revisit the chapter after cost of capital and capital structure to see how the links work.

Common mistakes in Sources of, and raising, business finance

  • Listing features of a source without linking them to the scenario

    Fix: Tie each point to a fact in the question, such as company size, listing status or available security.

  • Treating retained earnings as a free source

    Fix: State that shareholders require a return on retained funds, so they carry the cost of equity.

  • Errors in rights issue arithmetic

    Fix: Set out a table of shares and prices, then divide total value by total shares and check the result is below the cum-rights price.

  • Confusing finance and operating leases

    Fix: Ask who bears the risks and rewards of ownership and over what part of the asset's life.

  • Describing Islamic finance as ordinary debt with a different name

    Fix: Explain that returns come from trade, leasing or profit-sharing tied to real assets, not from interest on a loan.

  • Giving a one-sided recommendation

    Fix: Recommend one option, give reasons, and note a key drawback or risk before concluding.

Last-day revision: Sources of, and raising, business finance

  • Match the finance term to the asset life: short-term for working capital, long-term for non-current assets.
  • Retained earnings are not free: shareholders expect a return on them.
  • Rights issue: theoretical ex-rights price = (existing shares × cum-rights price + new shares × issue price) ÷ total shares.
  • Value of a right per new share = theoretical ex-rights price − issue price.
  • A rights issue at a deeper discount does not by itself make shareholders worse off if they take up or sell their rights.
  • Debt is usually cheaper than equity because interest is tax-deductible and lenders face less risk.
  • Debt adds financial risk through fixed interest and possible security or covenants.
  • Finance leases put risks and rewards with the lessee; operating leases do not.
  • Convertibles give lower interest now in return for possible dilution later.
  • Islamic finance avoids interest (riba) and uses asset-backed or profit-sharing structures.
  • Venture capital brings funds and expertise but needs an exit route and gives up some control.
  • Dividend policy signals information; view it alongside investment needs and shareholder expectations.

Sources of, and raising, business finance practice questions

Sources of, and raising, business finance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Sources of, and raising, business finance: frequently asked questions

Is this chapter mainly theory or calculations?

It is mostly discussion, with a few calculations such as rights issues and lease-versus-buy. Both appear in objective questions, and the written Section C questions often ask for reasoned advice. Prepare for both.

How do I choose between debt and equity in an exam answer?

Look at gearing, cash flow stability, available security and the company's status. A firm with high gearing and weak cash flow will struggle with more debt, while one with stable cash flows and spare security can take it. State your reasoning from the facts.

What is the key idea behind a rights issue question?

Existing shareholders are offered new shares at a discount, which lowers the share price to a theoretical ex-rights price. The value of a right is the gap between that price and the issue price. Show a clear table so you can score method marks.

Do I need to know Islamic finance in detail?

You need the main principles and common structures, and how they differ from conventional borrowing. Focus on the ban on interest and the link to real assets or profit-sharing. Be ready to compare them briefly with conventional finance.